Craniofacial dysmorphologies are a component of approximately 75% of birth defects worldwide (CDC, 2010). Proper craniofacial morphogenesis and patterning of tissues requires integrating signals from distinct tissue sources. Children born with Focal Dermal Hypoplasia and Aplasia Cutis Congenita have patches of skin that lack dermis. Congenital skin and dermal defects, chronic wounds, and severe large area burns present a debilitating array of chronic problems. The genetic basis of congenital dermal defects is associated with a loss of Wnt signaling function. We found that dermal Wnt/- catenin signaling is required to promote dermal fibroblast fate and suppress cartilage fate. The challenge remains to define how -catenin activity functions to suppress alternative cell fates and which tissue sources of Wnts contribute to generating -catenin activity during dermal lineage induction and differentiation. We recently discovered that -catenin activity is critical fr down-regulation of genes that are targets of Polycomb Repressive Initiation Complex (PRC2) in cranial dermal fibroblasts. These genes include Sox9 and Collagen21, which are determinants of the cartilage lineage. We have also identified the surface ectoderm and cranial mesenchyme as Wnt sources; surface ectoderm Wnts are required for dermal -catenin activation and prevention of cartilage formation. The hypothesis underlying this proposal is that ectodermal and mesenchymal Wnts sequentially generate -catenin activity-dependent PRC2 repression of genes to ensure lineage restriction and promote dermal development. Towards this goal, in Aim1 we will demonstrate that -catenin activity recruits PRC2 to suppress alternative cell fates in cranial dermal fibroblasts. These findings will provide new mechanistic insight into -catenin function and lineage restriction. In Aim2, we will determine if mesenchymal Wnts function downstream of ectodermal Wnts to propagate Wnt/-catenin signaling for cranial dermis and meninges formation. Our approach with tissue-restricted deletion of Wntless, which is required for trafficking of all Wnt ligands, will reveal the interdependence between Wnt sources for craniofacial development. Impact: The fundamental knowledge gained through this work will provide a new framework to understand how -catenin activation interacts with the epigenetic silencing machinery to ensure lineage restriction and promote the formation of craniofacial dermis of the skin. These results will be relevant not only in other cell types in development, but also in cancer, where both -catenin activity and PRC2 activity are dysregulated. Our results from tissue-specific deletion of Wntless have implications in diseases and in better understanding the pathogenesis of craniofacial birth defects.